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Chapter Learning ObjectivesAfter studying this chapter you should be able to:

1. Discuss the nature of entrepreneurship.

2. Describe the role of entrepreneurship in society.

3. Understand the major issues involved in choosing strategies for small firms and the role of international management in entrepreneurship.

4. Discuss the structural challenges unique to entrepreneurial firms.

5. Understand the determinants of the performance of small firms.

The Nature of Entrepreneurship

• Entrepreneurship–The process of planning, organizing, operating, and

assuming the risk of a business venture.• Entrepreneur

–Someone who engages in entrepreneurship.• Small Business

–A business that is privately owned by one individual or a small group of individuals.

–It has sales and assets that are not large enough to influence its environment.

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The Role of Entrepreneurship in Society

• Research Findings:–Most new businesses fail within the first few years of

being founded. –More than 97% of U.S. businesses are small with

fewer than 100 employees.–Most U.S. workers work for small businesses.–The majority of small businesses are owner-operated.–Small business is a strong presence in both mature

and emerging economies.–Small business has a strong effect on job creation,

innovation, and is important to big businesses.

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FIGURE 5.1 The Importance of Small Business in the United States

Approximately 86 percent of all U.S. businesses employ fewer than 20 people; another 11.7 percent employ between 20 and 99 people. In contrast, only about 2.1 percent employ between 100 and 400 workers, and another 0.2 percent employ 500 or more.

24.5 percent of all U.S. workers are employed by firms with fewer than 20 people; another 29.6 percent work in firms that employ between 20 and 99 people. 25.5 percent of U.S. workers are employed by firms with 100–499 employees, and another 20.3 percent work for businesses that employ 500 or more total employees.

Entrepreneurship’s Role in Society

• Small Businesses’ Role in Job Creation–Create many of the new jobs in the U.S.–Dominate sectors that have added the most jobs.–Represent 92% of all U.S. exporters.

• Innovation–Major innovations are as likely to come from small

businesses as from large firms.–Much of what is created in the high-technology sectors

comes from start-up companies.

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FIGURE 5.2 Representative Jobs Created and Lost in 2009

Aetna

Wal-Mart

Home DepotVerizon

CommunicationsSprint Nextel Corp.

Johnson & Johnson

IBM

Merck

Pfizer

Caterpillar

–1,240

–1,450

–7,000–8,000

–8,000

–8,900

–10,000

–16,000

–19,500

–20,000

Whole Foods Market

Microsoft

T-Mobile

Google

Nordstrom

Cisco Systems

Deloitte

Accenture

Edward Jones

+8,570

+7,130

+3,586

+3,550

+2,421

+2,412

+2,311

+2,176

+2,1290

JOB LOSSES

JOB GAINS

Entrepreneurship’s Importance to Big Business

• Most products made by large manufacturers are sold to customers by small businesses.

• Small businesses as suppliers provide large firms with services, supplies, and raw materials.

• Large businesses outsource many routine business operations such as packaging, delivery, and distribution to small businesses.

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Strategy for Entrepreneurial Organizations

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Emphasizing distinctive

competencies

Gaining first mover advantage

Choosing an industry in which

to compete

Basic Strategic Challenges

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FIGURE 5.3 Small Business (businesses with fewer than 20 employees) by Industry

Services are the fastest growing

segment of small-business enterprise.

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FIGURE 5.4 Economies of Scale in Small-Business Organizations

Strategically Utilizing Distinctive Competencies

Identifying new markets

Taking first-mover advantage

Identifying niches in current markets

Seeking CompetitiveAdvantage

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Emphasizing Distinctive Competencies

• Identifying niches in an established market–Finding part of a market not currently being exploited

can offer a competitive advantage.• Identifying new markets

–Transferring an existing product/service to a new market can create new industries/products/services.

• Taking first-mover advantage–Exploiting a market opportunity before any other firm

does can result in a competitive advantage.

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Management Challenge Question

• What would you caution an entrepreneur about the dangers of taking first-mover advantage?

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Writing a Business Plan

• Business Plan–Is a document that summarizes

business strategy and structure.–Should include:

• Business goals and objectives.• Strategies used to achieve these

goals and objectives.• A plan of how the entrepreneur

will implement these strategies.

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Entrepreneurship and International Management

• There is potential for expansion and growth in foreign markets.

• While there are risks, entering a foreign country’s market can be a real catalyst for success.

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Starting a New Business

• Buying an Existing Business–Business has a proven ability to draw customers

and make a profit.–Networks are already established.–Negative: New owners inherit existing problems.

• Starting from Scratch–Avoids problems associated with previous owners.–Allows freedom to choose suppliers, equipment,

location, and workers.–Negative: More business risk and uncertainty.

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Identifying a Business Opportunity

Who are my customers?

Where are they?

At what price will they buy my

product?In what quantities will

they buy?

Who are my competitors?

How will my product differ from

those of my competitors?

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Financing the New Business

Venture Capital Companies

Small-Business Investment Companies

SBA Financial Programs

Sources of New Business

Financing

PersonalResources

StrategicAlliances

Lenders

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Financing the New Business

• Personal Resources– Using own money and

money borrowed from friends and relatives to finance the business.

• Strategic Alliances– Partnering with established

firms such as suppliers in a mutually beneficial relationship.

• Lenders– Obtaining funding from

traditional lenders (e.g., banks, independent investors, and government loans).

• Venture Capital Companies– Groups of small investors

who provide capital funds to small high-growth potential start-up firms in exchange for an equity position (stock) in the firms.

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Financing the New Business (cont’d)

• Small-Business Investment Companies (SBICs)–Are investor-owned companies that borrow money

from the SBA to loan to small business with high growth potential.

–Minority Enterprise Small-Business Investment Companies (MESBICs) specialize in financing businesses owned by minorities.

• SBA Financial Programs–Provide assistance (e.g., SBA-guaranteed loans) for

small businesses unable to get private financing at reasonable terms.

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Seeking New Business Advice

Advisory Boards

Management Consultants

Small Business Administration

Networking with Others

Sources of Management

Advice

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Sources of Help for Entrepreneurs

• Boards of directors• Management consultants• SBA• Trade associations• Small-business networks• Pooling

• Accountants• Bankers• Lawyers• Insurance agents• Computer consultants

Management Help Professional Help

Outside Help

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Franchising

• Franchising Agreement–Operation of the franchised business

by the entrepreneur (the franchisee) under a license by a parent firm (the franchiser).

–The entrepreneur pays the parent firm for use of trademarks, products, formulas, and business plans.

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Franchising (cont’d)

• Advantages–Reduced financial risk

of new business success through experience provided by franchiser.

–Training, financial, and management support by franchiser.

• Disadvantages–Start-up fees to

purchase franchise.–Limitations of franchise

(market area, product, customers).

–Loss of independence due to imposed operational controls of franchiser.

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Management Challenge Questions

• What characteristics of a franchisee would an entrepreneur/franchisor likely find most attractive?

• What aspects of this relationship could be detrimental to either party?

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FIGURE 5.5 Business Start-Up Successes and Failures

The Performance of Entrepreneurial Organizations

Crossovers to small business by former large-business

employees

The emergence of E-commerce

Trends in New Business Start-Ups

Better survival rates for small businesses

Increased entrepreneurial opportunities for minorities

and women

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Entrepreneurial Success and Failure

• Reasons for Failure– Managerial incompetence/

inexperience of the entrepreneur.

– Neglect in not devoting sufficient time and effort to the business.

– Weak control systems that do not warn of impending problems.

– Insufficient capital to sustain the business until it starts to turn a profit.

• Reasons for Success– Hard work, drive, and

dedication by the entrepreneur.

– Careful analysis of market conditions provides insights about business conditions.

– Managerial competence through training and experience contributes to success.

– Luck sometimes plays a role.

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